Global investors scouring for deals in India’s lucrative solar power market

Global investors, including pension funds, are attracted to India’s burgeoning solar power market likes bees to honey.

Some of the world’s biggest pension funds are increasingly drawn to India and are scouting for deals in green investments. Indian Prime Minister, Narendra Modi has set a target of $100 billion in investment in the next five years for India’s solar power sector.

.With a surge in the number of people moving to cities, the demand of power in Asia’s third-largest economy is to go through the ceiling. As per estimates, India’s peak electricity demand is set to quadruple in the next two decades to 690 gigawatt (GW).

This provides rampant opportunities for growth for companies in the electricity generation and transmission business.

The government’s move to curb pollution has drawn in global investors, including Canada’s Ontario Teacher’s Pension Plan (OTPP), Canada Pension Plan Investment Board (CPPIB), and Caisse de dépôt et placement du Québec (CDPQ).

The fact that the cost of solar materials are cheap in India have definitely played into the decision to invest in India for global investors. Their primary area of focus is funding large-scale solar parks and solar power generation.

As per New York Stock Exchange (NYSE) listed CDPQ, which has a $199 billion (C$270.7 billion) in net assets, it plans on investing in India’s solar sector with Azure Power, another NYSE listed firm which has 1 GW of solar capacity under various stages of development.

“We plan to do more with them. Our approach is really to pick the right partner and then build a platform that can be sustained over several years,” said Anita George, CDPQ’s South Asia head. She went on to add, she wouldn’t rule out investing in other solar ventures in future.

The other international investors who have invested in India’s lucrative renewable energy sector includes, European utilities EDF, Engie and Enel, Dutch fund manager APG, Canada’s Brookfield Asset Management and private equity arms of Morgan Stanley, Goldman Sachs and JPMorgan.

APG Asset Management, which last year agreed to jointly invest $132 million with India’s Piramal Enterprises into solar power, is looking for more deals.

“We expect to be able to announce another investment in the Indian renewable energy sector in the coming months,” said Hans-Martin Aerts, APG’s infrastructure head for Asia Pacific.

As per Alok Verma, an executive director at Kotak Investment Banking who advises companies on renewable deals, companies are likely to boost Indian’s solar power generation by at least 5 GW from next year. Most of this investment will be supported from overseas funds.

Suyi Kim, the Asia Pacific head at CPPIB supports this view. CPPIB is Canada’s largest pension manager. She opines that solar appears more attractive in India than wind power.

“In India, my impression is that solar seems to be more attractive. But it’s case by case,” said Suyi Kim.

India typically enjoys more than 300 days of sunshine.

As per Mercom, a research firm, the funding and M&A in India’s solar sector amounted to nearly $1.6 billion during the January to March period.

All of this however comes at a risk. According to industry experts bidding for projects in government auctions are very aggressive: unit prices have slumped by more than 70% since 2010.

“Getting returns on investments … and getting paid by distribution companies are the major risks being assessed by foreign investors,” said Sumant Sinha, CEO at ReNew Power, a renewable energy firm backed by Goldman.

Intermittency, the power that is produced under bright sunlight, is another issue. Then there are overheads, including additional costs for using inverters or diesel generators to use solar power at night.

“Based on current market conditions and policies, I see a path to 65-70 GW (solar capacity) by 2022, but not more,” said Mercom CEO Raj Prabhu.

He went on to add, “To reach 100 GW by 2022, distribution company finances need to improve drastically, power demand has to increase quickly, and transmission infrastructure needs to keep up”.

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